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Cryptocurrency KYC/AML is successfully keeping dirty money out

Posted: 3 July 2018 2:56 pm News

Converting dirty crypto to filthy fiat has become a risky step for criminals to take.

Dark web purveyors were quick to embrace bitcoin as a semi-anonymous medium of transfer, which has given cryptocurrency a somewhat shady legacy that's been hard to shake and certainly isn't helped by the fact that cryptocurrency is an undeniably fantastic medium of exchange for those involved in illicit activities.

But as they say, there's no rest for the wicked. Being able to conduct transactions with cryptocurrency hasn't prevented big-time drug dealers from facing a new bottleneck – the need to convert crypto to fiat.

That this bottleneck exists shows that the know your customer (KYC) and anti-money laundering (AML) procedures currently being carried out by reputable cryptocurrency exchanges are working very effectively and even surpassing bank systems.



Going undercover

It didn't take too long for police forces to get around the relatively simple process of tracking bitcoin transactions and matching them to parcel deliveries, but it took longer to start directly targeting the crypto-to-fiat bottleneck.

This changed last week, with the US Justice Department announcing that it had successfully pulled off the first broad nationwide undercover operation targeting darknet vendors, arresting more than 50.

In a sign of the times, the seized assets included only about $3.6 million in US dollars and gold bars, but more than $20 million worth of cryptocurrency.

The arrests were made by going undercover and targeting those who wanted help converting that cryptocurrency into US dollars. That so much of the seized funds were still in crypto might highlight how much demand there is for these kinds of services on the dark web.

"The Darknet is ever-changing and increasingly more intricate, making locating and targeting those selling illicit items on this platform more complicated," said deputy attorney general Rod Rosenstein. "But in this case, HSI special agents were able to walk amongst those in the cyber underworld to find those vendors who sell highly addictive drugs for a profit."

He's referring to an undercover operation in which police posed as money launderers who could help dark-web drug dealers convert crypto to cash. In its simplest terms, this just means approaching people on platforms like LocalBitcoins.

In at least one instance, it also means taking over the accounts of existing users with their permission. This might be made easier by somewhat vague statutes in the US, which have sometimes seen crypto sellers on platforms like LocalBitcoins unwittingly cross the blurry line between selling bitcoin, and becoming an unlicensed money transmission business. By picking out those who may have crossed the line, authorities may be able to start offering leniency in exchange for use of their accounts.


It also notes that the users knowingly providing money laundering services to drug dealers tend to stand out because they tend to do a lot of business despite setting prices considerably higher than KYC compliant exchanges.

What's next?

The Secret Service has recently declared privacy coins to be one of the greatest national security threats currently facing the USA, while Japan's financial services authority has already declared an outright ban on anonymity-focused coins in the country.

They might have every reason to be concerned. Privacy coins have been constantly growing in popularity on the dark web and running on an inevitable collision course with authorities for a long time. The ability to conduct anonymous transactions would make it much more difficult or even impossible to directly tie criminals to their spending habits and make it much harder to successfully pursue a case.

The coins themselves might be able to move invisibly, but they'll generally still leave a mark whenever they come back into contact with fiat currency on a platform like LocalBitcoins or on a reputable AML/KYC compliant exchange.

A new tipping point comes when this fiat link is no longer necessary, and when crypto is so widely accepted that criminals can sell things for crypto, and then buy whatever they need with crypto, all without ever stepping into the fiat-currency world or ever needing to touch an AML/KYC-compliant entity. How authorities respond to these challenges will vary from country to country, but without a properly unified global stance on cryptocurrency regulation, individual efforts from single countries might lose some of their effectiveness.

The oldest trick in the book – going undercover – might become an increasingly important part of the law enforcement arsenal in the future. Going beyond that, and trying to find a way to actually track all transactions and outright ban anonymous coins the way Japan did, might simply be incompatible with reasonable rights to privacy.

Police around the world are quickly learning to adjust to cryptocurrency, but the biggest adjustment periods may be yet to come.


Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and XRB.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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